The Role of Annuities in Estate Planning

Fixed indexed annuities (FIAs) offer a combination of growth potential and protection that can play an important role in retirement plans. But FIAs offer another aspect that financial professionals and clients might overlook: they can be an integral part of an estate plan.

Here are four ways FIAs can add to your plans.

1. Flexibility leaving a legacy
Many fixed indexed annuities offer the ability to leave a legacy (death benefits) that provide a guaranteed source of funds for family members. These benefits can be built into the base contract or offered as optional riders (available for an additional cost), and their flexibility helps clients tailor their estate plans to their specific needs.

For example, they may allow the option of surviving spouses to continue receiving income for the remainder of their lives. Alternatively, clients who want to protect their non-spouse heirs may be able to choose from several death benefit options.

A typical annuity death benefit allows a beneficiary to receive the higher of a guaranteed minimum amount or the Accumulation Value as of the latest Contract Anniversary.

A "return of premium" benefit gives heirs the greater of the annuity owner's initial premium payment, or the Accumulation Value as mentioned above. 

Legacy riders may offer guaranteed increases to a benefit base amount determined at issue, or through credits based on any interest earned in the base contract.

In addition to the array of legacy options available, beneficiaries can also often choose how they receive the funds. For example, they may be able to:

Collect a lump sum
Take regular payments for a period of time
Defer receiving payouts

2. Avoiding probate
The probate process can delay heirs from receiving assets. What's more, probate can be expensive: between court costs and attorney and appraiser fees, probate can cost as much as 5 percent of the value of an estate.

Clients may value an estate plan that includes ways to avoid probate whenever possible. Because FIAs allow owners to specify a beneficiary, they may allow clients to pass on a portion of their wealth without having to go through the probate process.

3. Tax benefits for spouses
Annuities that are passed on to a spouse typically are not included as part of a taxable estate. This treatment may appeal to wealthier clients whose families are likely to face an estate tax bill.

If the death benefit passes to a beneficiary who is not the spouse, however, it is included in a taxable estate. Also note that payments collected by any beneficiary will be subject to income tax.

4. Growth potential
Fixed indexed annuities offer interest rates that are partly tied to the performance of an underlying stock market index. This feature allows clients to benefit from market gains without investing directly in stocks, which can protect savings from market downturns. Including a FIA in an estate plan may help increase the amount of money available to pass on to heirs.

Growth within a FIA can be used to increase the legacy that's available for heirs when an optional rider is chosen. Alternatively, clients have the freedom to use income from an annuity however they choose. Perhaps they may decide to pay for everyday retirement expenses like food and transportation, allowing them to leave other assets untouched — helping to preserve wealth to pass on as a legacy.